Monday, December 22, 2008

$70/hour Auto Workers

I've just been reading a column by Eric Boehlert in which he complains, at great length, that the media is propagating a false claim that auto workers get paid $70/hour. He writes "Simply put, GM's labor costs are not synonymous with hourly wages earned by UAW employees. Many in the press have casually used the two interchangeably. " He offers nine quotes from media sources, but only one, from National Review, actually makes the claim he is objecting to. One other makes a claim about how much the average auto worker makes per year. The rest put their numbers in terms of total compensation, wages plus pensions and benefits, or similar terms.A good deal of Boehlert's indignation is based on the fact that labor costs as calculated include pension and medical benefits to currently retired workers. He regards this as obviously wrong, since the money isn't being paid to the current workers. But it isn't that simple. The cost of pensions is incurred when the worker is employed but paid—assuming, as I gather is the case, that these are not prepaid plans with fixed benefits—when he retires. If labor costs only count what is currently paid to current workers the cost of pensions will be left out, substantially understating both the benefit to the auto worker and the cost to the company. Ideally, the calculation should be done using costs when incurred. But pension and medical costs are not known when they are incurred, since at that point the company does not know when the worker will retire, how long he will live thereafter or what his medical costs will be. So the choice is either to use a current estimate of the future cost of benefits to current employees or a current figure for current cost of benefits to past employees. Neither gives a reliable figure for the future cost currently being incurred and it is not obvious which is better. The one problem I can see with estimating the labor cost per hour using current expenditures for both current and past workers is that the number of employees and their terms of employment change over time. If, as seems likely—I haven't checked—the number of employees is substantially less than it was in the past, then dividing current pension payments by the current number of workers gives too high an estimate for the per worker cost being incurred for pensions to current workers. On the other hand, if pension terms now are more generous than they were for many of the currently retired workers, that would bias the numbers the other way. Similarly for medical costs--if we assume they will be higher in the future than they are now, then using current costs paid underestimates future costs currently incurred.All of those are details and none of them were mentioned in Eric Boehlert's column. At the simplest level, and assuming the companies aren't trying to include both pension costs incurred and pension costs paid, which would be double counting, he is wrong. What he regards as a blatant deception is a better estimate for the real cost per hour of employing auto workers than it would be if corrected in the way he wants it to be.

Leonhardt in the NYTimes seems to indicate that they are double counting; he indicates $40 for cash wages and $15/hour in "fringe benefits, like health insurance and pensions". I assumed, when I read the article, that this meant an estimated NPV of costs incurred for hours being worked now.

It's also important to remember that the $70/hr was repeated several times on television as well as in print. At any rate, even including the most generous benefit plans, however calculated, are probably not going to account for the $90-100k difference with reality or that apparently civil engineers (who deservedly make a fair bit more than people on the line) are part of the UAW as well.

Here's something that annoys me about the media commentary. It is often said that GM spends "$3,000 per car" or some such on retired workers which makes it uncompetitive. This is nonsense, since payments to retired workers are not a cost of production any more than payments to bondholders.

I have read (I cannot vouch for the accuracy of this) that the benefits for retired employees are continually being renegotiated by the union (ie, the firms are bullied into increasing them above previous contractual commitments). If so, those costs are indeed a current cost of employing UAW members now, and legitimately construed as a burden on current production, because most of those costs would presumably not otherwise exist.

I've looked into this and can't find any good data. From what I can tell, the current workers are paying into a pension system they will never benefit from. This is not unlike social security: social security taxes paid by the employer are "compensation," even if the employee will never see the money. The $70 figure is correct, however. At $2400 per car figure in labor costs (according to UAW), divided by about 33 hours in labor per vehicle (not disputed by the UAW on their website), gets you to $72/hour (again, not disputed by the UAW, if you read closely).

Your reasoning certainly sounds good as to why it's a good expression of actual benefits. However, the problem was, as so often is the case, the practice of filing off the units/context and using them as a rhetorical weapon. Nothing you said is attached to that number being bandied about in the media, fostering -- quite deliberately I expect -- the widespread miscomparsion of that $70/hr total compensation with the listener's own $/hr cash wages.

I'm under the impression that hereabouts, an employee paid $35/hr costs the employer about $70/hr. As it happens I am paid about $35/hr gross wages (~$70k). Where I live, a family of four with an income of $70k is eligible for low income homebuyer programs from the municipality.

I will take you at your word even though what you cited was not "law" but rather a publication of accounting standards. Regardless, if all the money that can be drawn to pay retirement benefits was not paid out by the company to a separate fund while the now retired worker was working, it is dishonest to not count it as a labor cost as the union is the one dictating terms of pensions.

There are three main forms of accounting; 1) Financial Accounting, 2) Tax Accounting, and 3) Cost Accounting.

Of the three, only Cost Accounting is used internally and it's the information that (virtually) never gets into the media or public eye. It is, though, the most cogent measure of what it costs to produce things.

It's apparent that the figures the media have been quoting is the COST data.

I look at it like a variable rate mortgage. You certainly don't know what interest rates are going to be in the future, but it rates go up -- that's your housing cost. It doesn't matter how bad your initial agreement was, or when it was made -- what you're paying is your cost.

I'm guessing their argument is that current workers aren't currently benefiting at the same rate the company is paying. Why would that matter? They've structured the same unknown benefits for themselves.

That link will take you to the US Census Bureau's 2005 and 2006 Annual Survey of Manufactures data for the automobile and light truck manufacturing industry. It has employment, payroll, hours, and benefits data.

Part of the reason that Boehlert is making this point (even if he didn't say it) is that quite a few pundits have contrasted the UAW compensation figures with foreign car company compensation figures. This is an incorrect comparison because the foreign firms have been operating in the U.S. for fewer years than have the Big Three. This means that the foreign companies have fewer retirees - and lower total compensation. This will obviously change in the future.

Any comparison of total compensation for foreign and domestic companies should include only liabilities related to current workers. Otherwise, it appears that the UAW is forcing American companies to pay uncompetitive wages. My understanding is that total compensation for current workers is quite similar for foreign and domestic auto makers operating in the U.S.